Bankruptcy Attorney and Law Professor’s Analysis on Life Insurance and the Bankruptcy Estate

This post is based on a situation that has happened several times throughout my career with clients. In this situation, the client had filed for Chapter 7 bankruptcy without an attorney and was told by the bankruptcy trustee that his life insurance policy would be seized. This is a common concern, and the answer depends entirely on the type of policy and the relevant state exemption laws.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Updated on November 23, 2025.

Listen: The Professor’s Audio Briefing.

Life Insurance and the Bankruptcy Estate

I will detail in this post how term life and whole life insurance policies are treated within the structure of the bankruptcy estate, a crucial distinction often missed by debtors.

Key Legal Concept: When a debtor files for bankruptcy, a bankruptcy estate is created under 11 U.S.C. § 541. All of the debtor’s legal and equitable interests in property, wherever located, become part of this estate, subject only to the debtor’s right to claim exemptions.

Key Points Summary: Bankruptcy and Life Insurance

Term Life Insurance

• No Cash Value: Term life policies have no cash value.
• Bankruptcy Trustee Interest: Since there is no current cash value, the policy itself is not considered a valuable asset of the bankruptcy estate and is of no interest to the Chapter 7 Trustee.
• Exemptions: There are no exemption issues as there is no value to protect.

Whole Life Insurance

• Cash Surrender Value: Whole life policies build up a cash surrender value, which is treated as a current asset of the bankruptcy estate under 11 U.S.C. § 541.
• Must Be Scheduled: This cash value must be listed on the debtor’s Schedule A/B (Assets).
• Exemptions: The debtor must use state or federal bankruptcy exemptions to protect the cash value. Any value exceeding the available exemption is non-exempt and belongs to the trustee.

Term Life Insurance: No Cash Value

Term life insurance is a policy that provides coverage for a specific, defined duration or “term.” It is frequently used in cases involving domestic support obligations, such as child or spousal support, where the policy’s term coincides with the length of the support obligation.

For example, the court ruled that x amount of child support is the obligation and the child is 10 years old. The term life insurance policy would last 8 years since that is when the child becomes an adult and child support is no longer required.

Estate Interest: Term life insurance, by design, has no immediate cash surrender value. Its value is dependent upon the death of the policyholder.

Trustee Action: Because the policy has a current cash value of zero, it is considered exempt. Therefore, while the monthly premium expense must be listed on Schedule J (Expenses), the policy itself is of no interest to the Chapter 7 Trustee.

Whole Life Insurance: Cash Value Issues

Whole life insurance policies are different from term life because they accrue a cash surrender value over time. This cash value represents an asset that can be accessed by the policyholder during their lifetime.

The Asset: In bankruptcy, the cash surrender value is a liquid asset that must be listed on Schedule A/B (Assets) of the bankruptcy petition. This value is easily determined by requesting a statement from the insurance carrier.

Trustee Action: The trustee will be interested in the cash value, as it is property of the estate. The key question then becomes: Is this cash value exempt?

Bankruptcy Exemptions and Life Insurance Proceeds

Bankruptcy exemptions are statutory protections that allow a debtor to keep certain property out of the reach of the bankruptcy trustee. Exemptions are state-specific, meaning they vary widely.

Applying the Law: For a whole life policy’s cash value, a debtor must claim the specific statutory exemption. Many states (and the federal exemptions, where available) have a specific exemption for life insurance policies or their cash value.

Example 1: If a debtor in State X allows a specific Life Insurance Exemption of $15,000, and the debtor’s whole life policy has a cash value of $10,000, the entire value is protected (exempted). The trustee takes nothing.

Example 2 (Nonexempt): If the cash value is $20,000 in State X with the $15,000 exemption, the $5,000 in excess value is non-exempt and belongs to the bankruptcy estate. The trustee could demand that the debtor turn over that $5,000 and those funds are used to pay the unsecured creditors.

Life Insurance Beneficiary Status: The Timing Problem

The trustee, particularly in a Chapter 7 case, is required to ask debtors at the 341 meeting of creditors if they are the beneficiary of any life insurance policy.

The Trustee’s Inquiry: The core concern for the trustee is whether the insured’s death is imminent. If the insured is healthy, the debtor’s interest as a beneficiary is speculative at best, so there are no exemption issues.

Risk of Loss: However, if the insured is suffering from a terminal illness, the debtor’s interest as a beneficiary is treated as a contingent future interest with present value, and the trustee may assert an interest on behalf of the estate.

The Professor’s Take: Bankruptcy attorneys should always ask debtors about their beneficiary status and the insured’s health during the initial consultation. Filing a case just days before receiving a substantial inheritance (like life insurance proceeds) can result in those funds becoming property of the estate. This even applies post-filing as under 11 U.S.C. § 541(a)(5) applies within 180 days of the petition date.

Chapter 7 vs. Chapter 13: The Remedy for Nonexempt Equity

The type of bankruptcy filed dictates how a debtor addresses any non-exempt equity (like the $5,000 in our previous example).

Feature	Chapter 7 (Liquidation)	Chapter 13 (Reorganization)
Duration	Typically 3–6 Months	3 to 5-Year Plan
Nonexempt Asset Action	Surrender or Pay Buy-Out: The debtor must surrender the non-exempt asset (e.g., the policy’s cash value) OR pay the full nonexempt value to the trustee, often over a short, 10–12 month period.	Pay Through Plan: The non-exempt value is calculated and paid back to creditors over the entire 36–60 month plan period.
Use Case	Ideal for debtors with few non-exempt assets.	Allows debtors to keep all assets (exempt and non-exempt) by repaying the non-exempt value over time.

The Professor’s Conclusion

A bankruptcy trustee will only take a policy if it has non-exempt cash surrender value (typically whole life) or if the debtor’s beneficiary interest is soon to be realized (imminent death of the insured). Term life policies are generally safe.

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You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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Updated initially on March 17, 2025.